Which of the following correctly explains the effect of an increase in the price of the product produced by labor on the labor demand curve in a perfectly competitive market?

• A. The labor demand curve shifts to the left because the marginal cost of labor increases.
• B. The labor demand curve becomes vertical because labor demand becomes perfectly inelastic.
• C. The labor demand curve does not change because product price does not affect labor demand.
• D. The labor demand curve shifts to the right because the marginal revenue product of labor increases.

Answer: (D)

Verified step by step guidance

1. Recall that in a perfectly competitive product market, the firm is a price taker, so the product price (P) is constant for the firm but can change due to market conditions.
2. Understand that the labor demand curve is derived from the Marginal Revenue Product of Labor (MRP_L), which is calculated as \(\text{MRP}_L = \text{MPL} \times P\), where MPL is the marginal product of labor and P is the product price.
3. Recognize that an increase in the product price (P) raises the Marginal Revenue Product of Labor (MRP_L), because each additional unit of output produced by labor now generates more revenue.
4. Since the labor demand curve represents the relationship between the wage rate and the quantity of labor demanded, and it is based on MRP_L, an increase in MRP_L shifts the labor demand curve to the right (an increase in labor demand).
5. Therefore, the correct explanation is that the labor demand curve shifts to the right because the marginal revenue product of labor increases when the product price rises.